What is it?
Section 721 of the Internal Revenue Code allows an investor to exchange property held for investment purposes for shares in an operating partnership without triggering a taxable event. The transaction provides investors with a way of increasing the liquidity and diversification of their real estate investments while deferring very costly capital gains and depreciation recapture taxes that may result from the sale of properties.
In a 721 Exchange transaction with SouthCoast, the property owner will contribute their property into the SouthCoast portfolio and receive an amount of SouthCoast shares equivalent to the net equity value of the contributed property.
The contribution of property into SouthCoast’s portfolio provides for a deferral of taxable income from the sale/transfer of the underlying real estate. In a typical property sale, seller would pay capital gains realized as well as the depreciation that was utilized to defer taxes on the property’s income. This could exceed 20-40% of the gains realized upon sale, leaving the investor with less capital for reinvestment. A 721 Exchange allows investors to avoid taxes and keep their wealth working for them in a tax deferred exchange of their investment property for shares in SouthCoast.
721 Exchange transactions are often utilized as an estate planning tool to prepare an investor’s real estate assets to be passed down to heirs. When direct real estate assets are passed to heirs, they are often difficult to quickly liquidate and equally divide among heirs. 721 transactions allow the estate to be prepared for easy transfer while deferring the capital gains that have built up over the years. Before death and passing down to heirs, the individual investor continues to receive dividend income. Upon death, the heirs can receive easily divisible shares in the SouthCoast operating partnership that can be much more easily liquidated upon passing of the estate. Heirs receive a step up in basis that permanently removes all capital gains and depreciation recapture taxes deferred in the estate.
Exchanging into the SouthCoast portfolio enables the investor to achieve diversification across geography, industry, tenant, and asset class. The contributing investor participates in a portfolio of over 75 unanchored neighborhood retail centers and is no longer concentrated and dependent on one asset to provide cash flow and appreciation.
An exchange into SouthCoast provides the same ongoing benefits of real estate ownership including income, depreciation tax shelter, principal pay down and appreciation. SouthCoast’s quarterly dividends will provide cash flow to the investor similar to when they owned their contributed property.
A 721 Exchange allows investors to trade an actively managed asset for ownership in a portfolio of assets that are actively managed by SouthCoast’s best-in-class real estate investment platform structured to provide acquisitions, property management, dispositions, investor communication, and the distribution of income produced from the portfolio.
Unlike a 1031 exchange, the property owner does not need to find a replacement property in order to participate in a tax-deferred exchange.